Business-Level Strategies

What are some firms that compete by having:--the lowest costs (besides WalMart)?--the best products (besides Apple)?

Michael Porter: HBS

Broad Cost Leader

– Competitive advantage: THE low-cost leader and operates with margins greater than competitors

– Competitive scope: Wide, All/Many segments– Integrated set of actions designed to produce or deliver

goods or services with features that are acceptable to customers at the lowest cost, relative to competitors

– No-frill, standardized goods– Low-cost position is a valuable defense against rivals– Profits come with high market share

Cost Leader Examples

Cost Leader Advantages

– Cost leaders are in a position to • Absorb supplier price increases and relationship demands• Force suppliers to hold down their prices

– Continuously improving levels of efficiency and cost reduction can• be difficult to replicate• serve as a significant entry barrier to potential competitors

– Cost leaders hold an attractive position in terms of product substitutes, with the flexibility to lower prices to retain customers

Cost Leader Risks

– Source of cost advantage becomes obsolete– Focus on cost may cause the firm to overlook

important customer preferences– Imitation– Not good for fragmented markets– Not good in dynamic environments

Broad Differentiation

– Integrated set of actions designed by a firm to produce or deliver goods or services at an acceptable cost that customers perceive as being different in ways that are important to them

– Target customers perceive product value– Customized products – differentiating on as many

features as possible– There are a lot of ways to differentiate.

Differentiation Advantages

• Large margins, fewer customers.• Buyer loyalty• Deters new entrants

Differentiator Examples

Differentiation Risks

– Customers determine that the cost of differentiation is too great

– The means of differentiation may cease to provide value for which customers are willing to pay

– Experience can narrow customers’ perceptions of the value of a product’s differentiated features

– Counterfeiting

Focused Strategies

• There are two “Focus” strategies– In general, the firms’ core competencies used to

serve the need of a particular industry segment or niche to the exclusion of others.• May lack resources to compete in the broader market• May be able to more effectively serve a narrow market

segment than larger industry-wide competitors• Firms may direct resources to certain value chain

activities to build competitive advantage

– Large firms may overlook small niches

Focused Cost Leaders

Focused Differentiators

Focused StrategiesAdvantages and Risks

– YES• Can charge high prices• Develop inimitable expertise

– NO• Limited demand• Focus can disappear over time• Others can slice out an even narrower focus

Best-Cost Strategies

• Target• Southwest• Chipotle

Best-Cost Risk:Stuck in the Middle!

Aesop: The Miller and His Son